The New Balanced Portfolio.

I recently asked if it was curtains for the traditional balanced portfolio. The post was in response to a few reader questions and concerns. We don’t know the future, but I would hold the opinion that a traditional balanced portfolio will still get the job done. That said, there are a few moves that we can consider to build the new balanced portfolio.

Here’s the original post that asks if it’s over for the traditional balanced portfolio.

And for a Canadian investor, here are the building blocks for a core couch potato approach.

For a traditional balanced portfolio I had offered this mix on the Model ETF Portfolio page. This is the classic 60% stock to 40% bond portfolio. Keep in mind this is not a recommendation. Please do your own research. And as always, ensure that you invest within your risk tolerance level.

The core couch potato approach can be simplified even further with the 3-ETF version offered on CanadianPortfolioManager.

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Of course within this approach we have US mid and small cap companies. We also have developing market equities. The balanced portfolio has certainly seen some evolution over the last decade.

So what’s missing?

Many portfolio modelers will suggest that the most glaring omission is real estate. While real estate can be included in the broad market indices it will present very modest exposure. That greater exposure is easily achieved by way of REIT ETFs.

As a real asset REITs are known to be a good inflation hedge and they can perform well in a rising rate environment.

For Canada we can use BMO’s ZRE.

You might consider Canada’s best performing REIT – CI First Asset RIT.

For US and International REITs the go-to ETF is iShares CGR. TD’s new offering is TGRE.

Increasing developing market exposure

Developing markets offer greater growth potential. Within these countries we see the rise of the middle classes. We see younger populations with greater population growth rates. The economic growth trends are much more favourable compared to developed markets.

Of course all of the leading ETF providers offer developing market ETFs. Here’s Vanguard’s VEE. You can also select a currency-hedged option.

Making some moves in the US and Canada

Exposure to those US mid and small cap stocks will add growth potential. Again, modest exposure is present in XUU and XAW. An index that captures the greater growth potential, innovation and creativity of the US market is the Nasdaq 100.

The index is dominated by technology, healthcare and consumer services. Innovation is at the core of this index methodology. Many will suggest this index provides exposure to the current and future global growth drivers.

BMO offers the Nasdaq 100 by way of ZNQ. Again, there is also a currency-hedged option available. It is more than interesting to see that Horizons pairs the Nasdaq 100 with the S&P 500 in their tax-efficient balanced asset allocation portfolio.

In the Canadian market portfolio mangers will often pair a low volatility ETF with a core broad market ETF. I recently wrote on BMO’s low volatility offering. That ETF offers a more balanced approach to sector allocation. And in fact it is light on Canadian banks, but offers over 10% exposure to REITs and over 16% exposure to Canadian utilities. ZLB might work nicely with an XIU, with the potential to deliver greater risk adjusted returns.

Of course pensions and sovereign funds will invest in private equity. That’s not normally accessible for the retail investor. But thanks to CI Direct Investing (formerly WealthBar), you can include a private pool fund component.

On the bond front

If we look back to that Horizons balanced asset allocation portfolio we see the inclusion of US treasuries. Mid and long term US treasuries are known to be of the best risk managers for equities. Given the low bond yields of the day it may make sense to use less bonds (if your risk tolerance permits) but use ‘better bonds’. And that is to say, ignore higher risk yield-chasing. You might not tilt to shorter duration offerings that offer lower yields and inferior stock risk management. Use the bonds that punch above their weight as risk managers.

Of course you can see from the Horizons table that they offer a 7-10 year treasury product. Keep in mind that is a tax-efficient total return ETF. That may be more suited to a non registered account that seeks greater tax efficiency.

BMO covers the US mid-term Treasury market with ZTM. They also have a short-term offering and cover long-term Treasuries by way of ZTL. Typically the longer the duration the greater the ability to manage the risk of stock market declines.

Developing markets bonds

Our friends at Canadian Robo Advisor ModernAdvisor were the first to alert me to the notion that developing market bonds are a wonderful addition to the Balanced Portfolio. They suggest those bonds can even work better than US bonds for a Canadian investor. Either way it’s another leg on that portfolio stool.

BMO offers the emerging markets bond ETF ZEF.

We might finish off the portfolio exercise with a look at Gold, one of the tried and true asset pillars. That’s a core component of the well-studied permanent portfolio. Gold may be a form of disaster insurance. It is often used by portfolio managers. Many would suggest even a modest exposure of 5%.

How about that new gold? Bitcoin

Arthur Salzer of Northland Wealth Management offers that bitcoin is gaining in popularity as an asset class, more than you would expect. You can have a read of Crypto’s role in a diversified portfolio.

Here’s my post on MoneySense – investing in bitcoin. I now have a 3% portfolio weighting. I will rebalance on schedule. A 5% weighting in bitcoin historically boosts returns by about 7% annual. I see that as an incredible risk-reward proposition.

Investors can gain exposure to Gold by way of GLD, a US-listed ETF. Horizons offers the futures-based HUG in Canadian dollars. You may have a look at Sprott for gold and precious metals. If you want to hold the gold producers there is iShares XGD.

That said we know that a larger basket of commodities and commodity stocks is a more reliable inflation hedge. S&P GSCI (orange bar) is the commodities basket.

You might stick to the larger commodities approach offered by that Purpose Real Assets PRA ETF. In U.S. accounts I use the Invesco DBC ETF.

For bitcoin I am using the Canadian ETFs. You can hold those in registered accounts such as TFSA and RRSP and RRIF.

Canada was first to approve bitcoin ETFs. It is very important to know the differences between bitcoin ETFs and bitcoin closed end funds.

Putting it all together

The goal or end result in ‘all of this’ might be better risk-adjusted returns. We’re adding more non-correlated assets. Some of the assets also offer greater total return potential as well.

To my mind adding those REITs, plus US and International bonds might be the two greater areas of opportunity. Those might be the two biggest holes in the traditional balanced portfolio. It’s no surprise that the Robo Advisors include those assets in their Balanced Portfolios.

Balanced Model

• 20% US equities. XUU plus ZNQ
• 15% Canadian equities. XIU and ZLB
• 10% International equities. XEF and VEE
• 15% Real estate. ZRE and TGRE.TO
• 25% Bonds. XBB and ZTM and ZEF
• 10% Gold. HUG or replace with PRA
• 5% bitcoin (3iQ) or ETFs

And certainly bitcoin is not for everyone. If you exclude bitcoin you can add that allocation space across the board for other assets. Or, if you want more growth potential, you would use that 5% allocation for equities.

Again, this is not a recommendation. To borrow from Seeking Alpha – Read. Decide. Invest.

The returns for 2021 – New Balanced Portfolio

And here’s the individual assets. I had to substitute a couple of ETFs so that the chart would run on portfoliovisualizer.com. Ensure that you are using Canadian Dollar ETFs for your Canadian accounts, and U.S. Dollar ETFs for your U.S. Dollar accounts.

When you invest with Questrade you will be using dual currency accounts.

I have used the bitcoin price. That said, the new Canadian bitcoin ETFs will closely track the price. They were launched in February of 2021. And yes, much of the credit for the outperformance goes to the modest bitcoin exposure. If we remove the bitcoin, the new balanced portfolio would only outperform by about 1% annual over the 5-year period.

Portfolio Assets 2021

5-year Returns – New Balanced Portfolio

Past performance does not guarantee future returns.

Please ensure that you understand all tax implications. You may decide to buy US dollar assets in US dollar accounts to avoid withholding taxes on dividends. For help on that matter you may have a read of Mark Seed’s what goes where article. But of course we might not always let tax considerations drive the bus. Asset allocation and risk management should rule the day.

If you need a greater master plan, please have a read of what is advice-only planning?

Thanks for reading. Please offer your thoughts in the comment section.

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